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If there is one issue in Italy that interests investment banks, private equity houses and fund managers above others, it is the fate of the multitude of family-owned businesses that continues to dominate the economy.

The CEO interview Andrea Guerra, Merloni

For years the financial world looked on enviously as these companies prospered largely unaided by instruments used elsewhere. But pressure from global markets is forcing families to contemplate bringing in outside investment and non-family management.

Within that context Andrea Guerra, the young, ambitious and talented chief executive of Merloni Elettrodomestici, Europe’s third largest white goods manufacturer, is a bridge between the two worlds.

His company has been the best performing significantly capitalised stock on any European bourse. According to the Italian daily, Il Sole 24 Ore, the value of Merloni’s shares has risen by 87% in the last 12 months. They are up 1,200% since listing and the company was nominated as European Corporate of the Year in the Financial News Awards for Corporate Excellence Europe 2002 last week.

Although still firmly controlled by the Merloni family, it is an example of a company that has made the successful transition to a public listing.

Merloni’s 2002 results confirm a trend that has been apparent for more than three years. Revenues rose by 26% despite difficult conditions and are expected to pass €3bn ($3.3bn) in 2003 after it consolidates its latest acquisition, GDA, owner of Hotpoint in the UK. Pre-tax profits jumped by 42%, guaranteeing that Guerra’s admiring investors will continue to smile at him.

But he is keen to point out that a big part of his company’s success is his partnership with Vittorio Merloni, chairman and son of the founder. “I have a fantastic relationship with him,” says Guerra.

Since it was Merloni who groomed him to take over, the assertion might come from deference. But Guerra is adamant that the two roles are compatible and provide the basis for good performance. “The family shareholders are very important because they define where we want to go in the long term, while the management gets on with running the company.”

Merloni, 37% of whose stock is free float, takes its minority shareholders seriously. The majority of its investors are UK funds specialising in small to mid-sized stocks. As many as 70% of Merloni’s outside investors come from the UK, demonstrating its considerable appetite for this type of investment.

Guerra would like to see a similar culture develop in Italy. “It would mean that there is an equity culture developing here too. At the moment that investment means little more than finding an index-linked fund.”

For two years running Merloni has won awards for its annual report and its solid reputation among investors has been built on a new policy of openness and availability. Guerra says fund managers would like to see more of him if possible but, short of taking them home with him, his job does not allow it.

But Merloni has not always been like this. It first listed on the stock market in 1987 when most Italian companies, particularly family-owned ones, considered financial markets an unnecessary and irrelevant interference in their business.

It was a bleak period for Italian listed companies, whose levels of transparency meant they were often shunned by international investors. Merloni in that period was not particularly attractive either. “The company did not have a very fruitful relationship with investors during its first 10 years as a listed company,” says Guerra.

It was recognition of this that prompted Vittorio Merloni in 1997 to decide that the company, which had been essentially a regional producer, needed a shake-up if it was to compete successfully internationally and have a better relationship with the market.

He became chairman and that year brought in Francesco Caio, the former chief executive of Olivetti, whose aggressive, no-nonsense management style had caused enormous upheavals at the office equipment manufacturer.

Caio, after completing a three-year spring clean, left to pursue his own ventures although he continues to have a seat on the board. After the dust settled, a new investor-friendly group emerged into the corporate sunshine.

Guerra, whose previous experience includes that of marketing director at Marriott Hotels and several management positions at Merloni, took over as chief executive with the mandate to continue the company’s growth.

Independent directors joined the board for the first time and have since become the majority. They include Hugh Malim, chief executive of Barclays Capital in Italy, Carl Hahn, honorary president of Volkswagen, and Luca Cordero de Montezemolo, chairman of Ferrari. The group also changed its dividend policy so that it pays a higher proportion of profits to investors.

“Most of all we started communicating with the market and there is no doubt that the closer relationship with investors has contributed to the performance of the stock since then,” says Guerra.

His strategy has been to pursue targeted acquisitions, while continuing to generate strong organic growth. He says: “If you only do acquisitions you overstretch yourself, while organic growth can never be enough by itself. You need to find the right balance.”

In June 2000 Merloni took the bold step of buying Stinol, the Russian refrigerator unit, for $169.3m (€152.4m). It was the biggest foreign investment in Russia since the country’s 1998 financial crisis and one that was regarded as a risk at the time. In January it took over GDA, the Hotpoint owner, to become the largest white goods producer in the UK.

Guerra is as pragmatic with investment banks as he is with fund managers. “We don’t have a house bank. We use whichever firm is the best for what we want to do,” he says.

Merloni was advised by ABN Amro and the investment banking division of the Moscow-based Renaissance Capital for its Russian acquisition. Lazard was hired to advise on the acquisition of GDA in the UK. Merloni has also tapped the debt capital markets through a bond issue worth E110m, arranged by Crédit Agricole, which was backed by trade receivables. “It was a cheaper way to have alternative funding. It is important that we have financial flexibility to make acquisitions when the right opportunity arises,” says Guerra.

Financial resources will be vital for Merloni. With consolidation accelerating in its main markets, the group will need acquisition finance and to ensure that its products compete.

Merloni can fund most of its needs through its strong cashflow. The chairman and chief executive share the view that the combination of family and market are vital for its success. But Guerra can see a day when this may not be possible.

“For the time being I do not foresee any problems. But in the longer term, the need to raise capital from the markets may make it more difficult for the family to retain control,” he explains.

Vittorio Merloni is also aware of the problem. He recently said he hopes that the chairman of Merloni will always be a member of the family, while outside management runs the group. But he added that he does not know if this will always be possible.

For other family-owned companies in Italy this is a real dilemma. Unless they tap the financial markets, they may not be able to compete internationally.

But being forced as a listed company to raise capital through, say, rights issues, which would give outside investors control, is enough to deter many family-owned companies from listing on the stock market.

On the other hand, fund managers and other investors would love the investment opportunities in these Italian companies to expand.

One of the biggest drawbacks to Merloni, as noted by analysts, is the relatively small amount of free float. It looks increasingly like the goose that laid the golden egg.

But no one is sure that it will carry on laying so prolifically without the love and affection of a good family.